What is expected shortfall used to measure?

Expected shortfall, also known as conditional value at risk (CVaR), is used to measure the average loss that an investment could expect to incur in the worst-case scenarios, specifically when losses exceed the threshold set by Value at Risk (VaR). This metric provides a more comprehensive assessment of risk in a portfolio because, unlike VaR, which only identifies the maximum loss over a specified time frame at a certain confidence level, expected shortfall takes into account the severity of loss during those extreme events.

By focusing on the average of the potential losses that exceed the VaR, expected shortfall captures the tail risk more effectively, making it a valuable tool for understanding the risk profile of an investment, especially in stress scenarios. This characteristic is particularly important for risk management, as it helps financial institutions and investors to prepare adequately for potential severe downturns.

The other options don't align with the purpose of expected shortfall. While total potential profits and average gains are important financial metrics, they do not reflect the risk associated with losses. The total investment cost also does not pertain to measuring risk from losses, making them unrelated to the concept of expected shortfall.